Building a portfolio and preparing for retirement can be tricky, and more than a little overwhelming. It definitely does not help when your investment advisor or financial advisor starts throwing a bunch of industry terms and acronyms into the conversation, making you feel completely out of your depth. Of course, you can (and should) always ask for clarification. But you have a lot of questions, and you would rather use your time getting advice specific to your situation and understanding your options, rather than feeling lost when your advisor uses terms that are not plain English.

At the Popowich Karmali Advisory Group, we are firm believers in giving people all of the information they need to make the right decisions for their situations; we have dedicated our careers to giving the people we work for those tools. In that spirit, we have put together a glossary of financial terms to give you a better grasp of what your advisor is trying to tell you, and free you up to ask deeper questions.

Investment Types

Annuity

An annuity is a contract, usually with an insurance company, designed to give you regularly scheduled payments at a specified rate. You purchase the annuity with an up-front lump sum of money. You receive payments on the annuity over a specified period of time. Annuities are illiquid, meaning that they typically cannot be cashed out without paying a penalty.

 

Bond

A bond is essentially a certificate promising that if you put money towards an issuer’s debt (either a private company or a government), they will repay it to you with interest. Bonds are different from stocks because they are an investment in debt rather than in the ownership of the company. Bonds come with a series of interest payments which will end once the bond term is completed, and the initial amount borrowed is repaid.

 

Exchange-Traded Fund (ETF)

An exchange-trade fund is a basket of several stocks and/or bonds. Rather than buying stocks and bonds individually, an exchange-traded fund allows you to invest in several assets at once, as managed by a company. The risks associated with an exchange-traded fund depend on the products it holds, and are generally subject to a management fee.

 

Guaranteed Investment Certificate (GIC)

A Guaranteed Investment Certificate is an investment that offers virtually no risk. These types of investments offer a guaranteed return over a specified time span, and are typically locked in for the duration of that span; if you withdraw the funds before the specified date, you may lose some or all of the interest you have earned. The return associated with Guaranteed Investment Certificates is lower than other types of investments because they are extremely low risk.

 

Mutual Fund

When you invest in a mutual fund, you purchase a basket of securities like an ETF. The money is managed and invested by a professional to certain specific goals. Each mutual fund is a little bit different because the portfolio is structured to line up with a specific set of investment goals, and carry fees that vary from fund to fund. They differ from ETFs mainly in how they are traded.

 

Security

A security is the name for your ownership or investment in an organization. For example, stocks, bonds and options are all securities.

 

Segregated Funds

A segregated fund is similar to an annuity, and is not traded on public markets. Once purchased, an investor must hold the segregated fund contract until its maturity (or face penalty charges to break the contracts). It provides annuity payouts over a set period of time. The payouts are dictated by the contract.

 

Stock

Stocks are another name for shares or equities, and represent small portions of ownership in a company. These portions can be bought and sold, and it is these types of securities that one usually thinks of when talking about the markets. They are typically considered higher risk than bonds or cash, as their value can fluctuate dramatically over a short period of time, and there is no guarantee they will retain their value (they could end up worthless).

 

Treasury Bill (T-Bill)

A treasury bill is a short-term, low-risk investment in the Canadian government (effectively, a bond). You can invest as little as $1,000. When your investment term is up (no longer than one year) you receive your initial investment back with the addition of the agreed upon interest rate.

 

Types of Retirement Accounts

TFSA (Tax-Free Savings Account)

As the name implies, a Tax-Free Savings Account allows you to save money and earn interest or investment returns without having to pay taxes on earnings that take place in the account. Even when you withdraw the earnings from the account, they are generally tax exempt. There is a limit on how much you can put into the account each year, and there are also some restrictions around re-depositing money that you take out of the account.

 

RRSP (Registered Retirement Savings Plan)

An RRSP is a plan that is built to help you save for retirement by deferring taxes on the earnings in the account until you withdraw from the plan. There is a maximum amount you can contribute to your RRSPs every year that is calculated for your individual circumstances and provided on your Notice of

Assessment by the CRA.

 

RRIF (Registered Retirement Income Fund)

While an RRSP is used to save for retirement, a RRIF is used to dispense that money to you as retirement income. In most cases, you open a RRIF by transferring the assets from your RRSP into it. The government requires that you open a RRIF in the year before you turn 72, and requires a minimum withdrawal every year once it is open. Earnings in the RRIF are not taxed; the earnings become taxable when they are withdrawn from the plan.

 

Other Important Terms

Actuary

A financial professional who assesses the potential risks and rewards associated with various financial strategies to help you make the right decisions when saving for retirement.

 

Asset

A valuable property or resource; it can include anything from your home to stocks to cash.

 

Canadian Pension Plan (CPP)

A program that entitles contributing Canadians and their families to partial earnings replacement in retirement. In Quebec, the CPP is replaced by sister program QPP. Your personal payment amount depends on a number of factors and is calculated by the government.

 

Commuted Value

The value of your total pension payments without interest.

 

Estate

The total of your assets that are left behind when you pass on, including properties, personal belongings, securities and other assets.

 

Guaranteed Income Supplement (GIS)

A tax-free benefit provided to low-income Old Age Security pension recipients on a monthly basis.

 

Indexing

The process of adjusting pension payments to take inflation into account.

 

Pension

A type of retirement plan that takes a percentage of your earnings during your working years and saves them, then pays it back to you on a regular basis at a certain age or when you retire. Pensions are typically offered through your employer.

 

Portfolio

A collection of investments held by one person, family or organization.

 

Principal

The original dollar amount invested or borrowed before accumulating interest or earnings.

 

Why Your Financial Literacy Matters

Many people are happy to take a backseat in their retirement planning and leave everything to their Financial or Investment Advisors. But the reality is, you are the best person to represent your needs, and your retirement should be tailored to your goals. When you prioritize your financial education, you empower yourself to hold your financial advisors and other professionals accountable to those goals.

If you are interested in learning more about taking an active role in your retirement planning, we host a monthly free retirement planning seminar. We would love to see you there. Click here to see when the next schedule is being hosted, or to register.